The political economy of policy transitions

Dealing with Losers: The Political Economy of Policy Transitions

By Michael Trebilcock

The long fight to end slavery, led by William Wilberforce, among many others, culminated in Britain with the enactment of the Slavery Abolition Act in 1833. This Act made provision for a payment of £20 million (almost 40% of the British budget at the time) in compensation to plantation owners in many British colonies — about US$21 billion in present day value. Moreover, only slaves below the age of six were initially freed while others were re-designated as “apprentices”, who were to be freed in two stages in 1838 and 1840. Wilberforce and many other abolitionists accepted that compensation and phased implementation was required to ensure enactment of the legislation, particularly by the House of Lords where plantation owners were strongly represented among the aristocracy.

Whenever governments change policies — whether tax, expenditure, or regulatory policies — even when the changes are on net socially beneficial, there will typically be losers. There will be people who have made investments predicated on or even deliberately induced by the pre-reform set of policies. Very few policy changes make somebody better off and nobody worse off according to their own subjective valuations (the economist’s concept of Pareto efficiency). The issue of whether and when to mitigate the costs associated with policy changes — whether through explicit government compensation, grandfathering, or phased or postponed implementation — is ubiquitous across the policy landscape.

Changes in land use regulations often exempt existing non-conforming structures. Environmental regulations, such as energy efficiency requirements for motor vehicles, are often phased in over time. More stringent requirements for qualification for entry into various professions often grandfather existing members of these professions. Stricter gun control laws often grandfather existing gun owners. In post-conflict nation building exercises, a qualified line in the sand is often drawn under past atrocities committed by antagonists.

The need to take transition cost mitigation strategies seriously, as a matter of political economy, stands in relatively sharp contrast to two long-standing traditions in economics which tend to marginalize this issue. Economists, from a normative welfare economics perspective, often publish academic studies that document the gross inefficiencies associated with various existing public policies. However, it is unrealistic to assume that once these inefficiencies are revealed, well-intentioned but unenlightened political representatives will immediately espouse the proposed reforms, or that alternatively an aroused citizenry will appropriately discipline venal political leaders that have been captured by rent-seeking interest groups.

An alternative positive tradition in economics — public choice theory — does take politics seriously but tends to view the existing policy outcomes of the political process as the best we can achieve in a world not populated by angels. An austere version of this theory offers few prospects that existing political equilibria can be disrupted; the iron triangle of incestuous relationships between politicians, regulators/bureaucrats, and rent-seeking interest groups is largely impermeable to change. This view is hard to square with the privatization of many state-owned enterprises and the deregulation of many industries in many countries from the 1980s onwards, and the dramatic growth in environmental, health and safety, and other forms of social regulation over this period, often over the opposition of concentrated interests.

I view the political process as much more fluid and malleable. Significant policy reforms are politically feasible with political leadership committed to judicious combinations of transition cost mitigation policies and astute framing of issues so as to engage not only the interests but also the values of a broad cross-section of a country’s citizens.

Michael J. Trebilcock is Professor of Law and Economics at the University of Toronto School of Law and the author of Dealing with Losers: The Political Economy of Policy Transitions. He specializes in law and economics, international trade law, competition law, economic and social regulation, and contract law and theory. He has won awards for his work, including the 1989 Owen Prize by the Foundation for Legal Research for his book, The Common Law of Restraint of Trade, which was chosen as the best law book in English published in Canada in the past two years.

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